洛克威爾自動化 (ROK) 2002 Q4 法說會逐字稿

Good day and thank you for holding and welcome to Rockwell Automation's quarterly conference call. I need to remind everyone that today's conference is being recorded. Later in the call we will open the lines for questions. If you have a question at that time, please press the star key followed by the digit 1. At this time, I would like to turn the call over to Tom Mullany, Rockwell Automation's Vice President and Treasurer. Mr. Mullaney, please go ahead.

Thank you, Operator. Good morning, everyone, and welcome to Rockwell Automation's quarterly conference call. I'm Tom Mullany Vice President and Treasurer, and on the call with me today is Don Davis, our Chairman and CEO, as well as Mike Bless, our Chief Financial Officer.

Please note that before we begin our comments today will include statements relating to future results of the company and are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those projected as a result of various risks and uncertainties, including but not limited to, those noted in our earnings release and those detailed from time to time in our SEC filings.

During this call today we will provide you with an overview of our fourth quarter and full-year results for fiscal year 2002. At the end of my review, Mike and Don will make a few comments and in the time remaining take your questions.

Fourth quarter income from continuing operations, as well as net income, was $49 million, or 26 cents per share. This result includes the following two items: Income of 2 cents per share from the favorable settlement of intellectual property matters and a charge of 2 cents per share related to an asset impairment and a workforce reduction at FirstPoint Contact. On a comparable basis, last year's fourth quarter earnings from continuing operations would have been $27 million, or 15 cents per share before special charges of 8 cents a share, amortization of goodwill of 6 cents a share, and income from intellectual property settlements of 6 cents per share last year.

Revenues in the quarter were $1,017,000,000, up 4 percent over last year's fourth quarter revenues of $976 million.

Now looking at the results for each of our segments, Control Systems revenues were $800 million, up 4 percent over last year's fourth quarter sales of $767 million. Sales were: Integrated Logix architecture increased by more than 34 percent over last year, while sales in our global manufacturing solutions business increased by 6 percent over last year's fourth quarter. Control System's U.S. sales in the fourth quarter were up 4 percent from last year's fourth quarter. Excluding translation, which had a negligible impact on quarterly sales, Control Systems international shipments were up 3 percent versus last year. The breakdown by region is as follows: Shipments were down 3 percent in condition; down 6 percent in Europe; up 14 percent in Asia Pacific; and up 31 percent in Latin America.

Control System's fourth quarter operating earnings were $85 million, up 16 percent from the 73 million reported in last year's fourth quarter. Operating earnings were primarily impacted by higher volume in the U.S. as well as the cost-reduction actions that have been implemented since last year. Return on sales for the quarter was 10.6 percent compared to the return of 9.5 percent in last year's fourth quarter.

Now turning to Power Systems, Power Systems' revenues were $184 million, up 10 percent over last year's fourth quarter sales of 167 million. Power Systems' sales were up 3 percent in motors and up 20 percent in the mechanical business. Power Systems had operating earnings of $15 million in the quarter compared to a $1 million loss last year, due to the higher volumes and the benefits of their Power Lean initiatives. Return on sales was 8.2 percent in the quarter versus the loss in last year's fourth quarter.

Looking at FirstPoint Contact, FirstPoint Contact had fourth quarter revenues of $33 million, down from the 42 million reported last year. Operating earnings were breakeven as a result of a $4 million charge related to the workforce reduction and the asset impairment. Last year's fourth quarter earnings were $5 million.

Some other items to note for the quarter - general corporate net expense of $14 million included $4 million of income from intellectual property settlements. General corporate net was zero last year, due to the inclusion of $18 million of income from such settlements. Interest expense for the quarter was $16 million compared to 17 million last year. The diluted average shares were 189.4 million for the quarter and outstanding shares at September 30th were 185.8 million.

Turning now to the results for the full year of FY2002, revenues of 3.9 billion were down about 8 percent from last year. Control Systems' revenues were down 8 percent and Power Systems revenues were down 4 percent from last year. Operating income of 381 million was down 20 percent from last year's comparable income of 474 million. Control Systems' earnings were down 24 percent while Power Systems' earnings were up 36 percent. Our full-year income from continuing operations before accounting change came in at $226 million, or $1.20 per share. This result includes the following three items: The benefit of 26 cents from the settlement of tax matters; income of 4 cents from intellectual property settlements; and the charge of 2 cents for actions at FirstPoint Contact.

Adjusted income from continuing operations before accounting change and special items was $174 million, or 92 cents per share versus 198 million, or $1.07 per share for continuing operations last year. Tax rate for the year was 24 percent, down from the 26 percent reported last year.

Now, including the accounting change of 108 million after-tax, or 58 cents per share, and income of 3 million after-tax of 2 cents per share for discontinued operations, diluted EPS for the full year was 64 cents.

Now let's look at the preliminary balance sheet information. Cash was $289 million, up 75 million from last quarter. Debt, both long and short-term, is reported at $929 million, down 38 million from last quarter. Our debt-to-total-cap ratio is 36.6 percent. Shareowners' equity was 1,609,000,000 at the end of September, which is up 29 million from last quarter. Book value per share was $8.66 at the end of September, up from $8.50 at the end of June. Finally, free cash flow was $148 million for the quarter and $372 million for the year.

That concludes the summary for the quarterly results. Now I'd like to turn the call over to Mike Bless for his comments.

Thank you, Tom. I appreciate everybody joining us this morning. I'm going to give just a little bit more color on the year in the quarter and then turn the call over to Don for some comments, as Tom said. Then we'll take your questions.

Looking back over the year, we are really, really pleased with the performance, both on the growth and the execution side in the company this year. Looking first at the growth initiatives that we've been investing in and tracking closely this year and talking to you about, we're really gratified by the performance of those key growth initiatives. Tom talked about GMS first and foremost. GMS, as you've noted, was up 6 percent both for the quarter and for the year. I think it's important to note that that performance came in a year where the product businesses were down in the 9 to 10 percent category. As you've seen, the company, as a whole, was down about 8 percent. So great performance by GMS in a very difficult market and, importantly, what that shows us is that the type of growth rates that we've had planned for GMS over the long term, strong double-digit growths, are very, very achievable in a more typical economic scenario.

Next, Logix, again, Tom talked about that - up 30 percent both for the quarter and for the year. You know how important this control architecture is for us. It's the basis, as we said, of almost everything we do, both in our product areas and, frankly, of a lot of the things we do in our service businesses as well. We are convinced that this is the premier control architecture out there in the marketplace and, frankly, we are continuing to invest a significant amount of time and resources in Logix. We're building applications on top of this architecture; we're developing it further. Frankly, we're running faster so that the competition doesn't have a chance of catching up here and, so far, the acceptance of this product by the customers in the marketplace has been outstanding.

A couple of other initiatives that we've continued to track - our process business, up 60 percent this year, obviously important to us, given that that was the market in which we really didn't participate a couple of years ago. The safety business grew nicely - a growing and important business for us, and, lastly, I want to note a business we don't talk about very much, which is our Power Systems service business. We talk a lot about GMS, which, as you know, is within Control Systems. Power Systems has built a nice - frankly, now, a nicely sized service business that was up 20 percent last year in that environment.

Lastly, I just want to note the geographic diversity upon which Tom touched. It's really important for us this year. As you know, the U.S. strengthened a little bit throughout the year and certainly stabilized in the second half. We've also had continuing good performance out of Latin America and Asia Pacific. Those were all very important to us throughout this year, as Europe remained very weak throughout the year and, frankly, we don't see very much good news coming out of Europe in the foreseeable future, either.

Turning quickly to the operating performance - you've seen the steady increases in operating profitability throughout the year. Control Systems, excluding the Warren matter, for which we reserved in the fourth quarter, earnings there - margins there - were up about 200 basis points from the first quarter to the fourth quarter, and that was including the continuing investment in GMS and the other growth initiatives that we talked to you about.

Power Systems had just an outstanding, outstanding year, and we couldn't be happier with the performance there. You've seen the numbers - sales down about 4 percent across the board, really. Motors and mechanical pretty much the same sales declined throughout the year consistent. Profits up 35 percent, so a terrific performance by the team down there with their various productivity initiatives, able to drive out performance of that type.

We don't talk a lot about FirstPoint Contact, either, and Tom touched on it. We're really pleased with the performance that team has managed to turn in an industry that, as you all know, has been wracked by chaos. Business was down about 10 percent this year, but if you look at those end markets that they serve, obviously, principally, telecommunications, markets were down 30, 40, 50 percent. So, for that group to have kept the performance where it was, they've made a lot of progress on the product development and market acceptance side and, obviously, the business was marginally profitable - a couple of million dollars of profit - very happy with it.

Lastly, Tom touched on the cash flow, which is, obviously, critical to us and the performance was truly outstanding, almost double net income of about $370 million of free cash flow, performance across the board, really, there. Working capital, a terrific success there in both receivables and inventory reductions and capital expenditures came in at about $104 million, which, frankly, was below the budget that we've been sharing with you throughout the year but, as we said, assuming that business didn't start to pick up strongly, we would come in under that budget, and we have.

I just want to touch on that cash flow in the financial profile of the company at this point, because it really is important to us. We started the year, we believe, with a pretty strong financial profile, and it's only gotten stronger throughout the year. You've seen the cash flow that we just talked about ended the year with about $290 million of cash on the balance sheet. Something to note about that cash - we repatriated a significant amount of cash throughout the year - about $100 million - so we finished the year with, frankly, most of that cash on the balance sheet being done on the sales in the United States, which is, obviously, critical to us, because we can use that cash efficiently to run our business and finance our business around the world.

I want to note that we just finished redoing our bank revolver that was a deal that we had put in place five years ago that was maturing in December this year. We just closed a new deal there. A lot of success over-subscribed significantly - a very strong group of banks came in - a $675 million revolver that we just put in place and, obviously, that revolver is just there to back stop our commercial paper program. We never have and don't intend to ever draw down on it and, frankly, as you know, we haven't been in the CP markets now for a couple of months and don't see getting back in them for the foreseeable future, because of the significant liquidity that we have inside the company.

I just want to finish noting why, as you know, this financial strength is so important to us. Obviously, it gives us the tailwind to continue to invest in the businesses that are important to us. It ensures that the dividend, obviously, that we have been paying and continue to pay, that we have more than enough flexibility to continue to do that. It ensures that we have plenty of capacity to continue to make the kind of acquisitions that we've been making - very successful acquisitions - in the - I guess I'd call it the small- to medium-type of bolt-on acquisitions, and we intend to continue to do that. They've been very successful for us.

Continuing, it will enable us - our financial position - to repay our bond issue that comes due later this year, as you know. We've got $150 million principal amount bond issue that matures in April, and we, obviously, have the capacity to refund those bonds out of cash and not refinance those, if we so choose.

Lastly, we do intend, with the financial firepower that we have, to get back in the marketplace and start repurchasing the stock again. As you may remember, we got out of the market when we announced the Collins spin-off and then stayed out, obviously, as the economy went down the tubes. We have been out of the market since then but, given the financial condition of the company - quite, quite strong - and, frankly, the level of the stock, we intend to be a pretty aggressive buyer of the stock here, going forward, and with that, Don, I'll turn it over to you for your comments.

Thank you, Mike, and good morning, everybody. I wanted to join this call today because, as you know, this is the completion of our fiscal year, and I wanted to talk a little bit about - put my own perspective on that performance and also to talk a little bit about where we see ourselves standing and, as best I can, try to describe what we think we're getting into as we look forward in '03.

First of all, I'd have to say that '02 was one of the most difficult years that I can remember trying to work our way through. A lot of erratic behavior in the economy, real - some people describe it as "choppiness," and I think that's probably a pretty good word, where one week to the next it changes a lot; one month to the next, it changes a lot; and one quarter to the next, it can change a lot. Therefore, obviously, very hard to predict what was going to happen.

You may recall that in the first - at the end of the first quarter - of the year we said that we felt like we had reached the bottom of the downturn that had started three quarters before that. Subsequent to that, the second quarter of the year was up sequentially 2 percent; the third quarter was up 4 percent; and the fourth quarter was up another 2 percent - all sequentially. I have to say, though, all during that time that you almost have to look back to see that, yes, it did, in fact, it did in fact go up, because as each month and each quarter unfolded, it didn't necessarily seem like that we were doing as well as those numbers would indicate.

During the period of time we maintained what we have described to you before as a balanced approach as how we wanted to run the business. While we were doing a lot of things based on our Rockwell Lean initiatives that are all over the company in every single business in many, many areas where we're taking costs out, reducing assets, taking actions to improve profitability and produce cash flow, and those have gone on every single month of the year.

At the same time we were doing that, we were continuing to invest in the things that we believed were important to the long-term future of our business, and we continue to do that. I'm also extremely proud of the fact that we gained market share in '02, and I've got to tell you, it's a fairly significant amount, and I'll say once again what I've said before - I've never felt better about the position of the business. Our core business is stronger than it's ever been, led by the whole Logix platform and the adoption rate of that. Our GMS is firmly established and I think is proving itself every single week and month, and I'd say we've got a very strong disciplined management team in place, and we're doing things today with a lot of confidence and with a sense of urgency - a lot of confidence in what we're doing and where we're going and a real sense of urgency to get it done.

Before every one of these conference calls, we have a conference call with a number of our people, especially in our sales and marketing organizations, to try to get a handle on where things are in what industries, and so forth, and then we try to compare that with the economic data that we collect and spend a lot of time trying to understand how things are going to go, and I would say that the economic data seems to be all over the place. The information and input that we get from our sales and marketing people and customers - there's a lot of crosscurrents with some feeling better about things, some not feeling so good about things, and the only way I know how to describe it is it's just a crosscurrent of ideas and thoughts out there.

There are some of - at least one industry - that right now is probably the most active and has - we saw increases in the fourth quarter just completed, and we believe those will continue into the quarter that we're in right now - in other words, the first quarter. And even over into the calendar year '03, maybe the first quarter of the calendar year '03, and that's - there are automotive projects that are being bought and implemented right now.

I don't think that these projects, as you know, the automotives can change their minds pretty quickly and shut the spigot off - I don't think that's going to happen here. I think they view - they need these products to be more competitive in their own marketplace, and I'm sure you've kept up with the discounting and so forth that they've done to maintain market share, and these products, these new products, are extremely important to them.

As we look ahead to '03 and taking all this into consideration, we're going to take a fairly cautious view in the short term, and yet we're very optimistic about where the company stands. You need to know that, from my perspective, our cost structure is in very good shape right now as we continue to take actions. As I told you, we do it on a monthly basis, and we continue to take those actions that keep that cost structure and asset base in what I consider to be very good shape.

Therefore, even if we see no improvement from the current business conditions, we are confident that we can produce a 15-percent EPS growth in '03. As you know, we have a business that is highly leveraged to volume upturns, and even with the most modest top-line increases, significantly higher increases, in our EPS will result. As I've said before, as I said, we are taking some cost reductions right now. In some cases reallocating some of the results of those actions, and we're doing that during this quarter that we're in right now to offset certain cost increases that we're experiencing. A perfect example is health care and insurance, which all companies are facing. We're not the only ones, but we feel that it's necessary to take these actions in this first quarter.

In addition, as you know, our first quarter is traditionally the weakest quarter of the year, because of - we refer to it as some seasonality - but it's basically because it's the fewest number of days in the quarter, and for those reasons we believe our first quarter earnings are going to be about flat with last year. I also want to note once again our strong financial position, as Mike did. We are extremely well positioned from a financial capability point of view and, as Mike said, we will be in the market repurchasing stock; we will continue to make the small- to medium-size acquisitions; and one final time - I've never felt more confident about where we are and how we're positioned in the marketplace. Tom?

Okay, thank you, Don. Operator, we'd now like to open the lines up for questions, and before we begin, I'd like to remind everybody if we could try to limit the questions to a couple of related subjects so we can get as many people as possible on the line to ask questions. We have about an hour total, so I just want to make sure we get as many as we can. Okay, Operator.

Thank you. Our question-and-answer session will be conducted electronically. Anyone wishing to ask a question may do so by simply pressing the star key followed by the digit 1 on your touchtone telephone. Just a reminder - if you are on a speakerphone, you must release your mute function in order for your signal to meet our equipment. Once again, if you would like to ask a question, please press star, 1 now. We'll take your questions in the order that you signal us, and we'll take as many questions as time permits.

We'll go first to Bob Cornell with Lehman Brothers.

Hey, good morning, everybody. A couple of questions - one, Don, you mentioned gaining market share here in the year. Maybe you could expand on that point, where you see the market share gains and maybe comment against what magnitude - what type of competitor? And I have a follow-up question, too.

Okay, Bob, the data that we get that's the most reliable, of course, is in North America. As you know, we all report to NEMA Data, and in our PLC business we've gained significant market share but basically it's all across the whole product line. The largest gain was in the PLC area, but every single category that we're in, we gained market share, and it's hard for us to say exactly which competitors, because it basically - probably every single one of them. I mean, I don't know that for a fact, because we don't get their data, and because it's hundreds and hundreds of different customers, and there's a different competitor in each one of them, it would be kind of hard to pin down exactly where those gains came from.

Let me ask a related question, Don - I mean, people rarely on these calls talk about some of the bread-and-butter stuff - the pilot circuit devices, the relays, pushbuttons, motor starters, I mean, how is that core product line doing, both in terms of revenue base, profitability, and market share? And one other question, too.

You know something -- shame on us. We should talk about those products, because those are absolutely core products. They continue to be core in the new products there and developments - maybe not to the same degree as we do the PLC area, but those gain market share as well. When I said across the line, I meant across the line; Pilot circuit devices, sensors, contactors, motor starters, motor control centers, the whole thing that we've been in for a long time.

Just one related question, and I'll pass the baton - you mentioned PLCs and historically the Asians have come in at the low end - you've got Siemens biting at you at the high end. What sort of a perspective there?

The way you described it has been correct, but what's going on right now, Bob, is the name of this game is not just getting in, the name of the game is continuing to invest on an ongoing basis, and I've got to tell you, those investments are pretty large if you're going to maintain your position in the marketplace.

We can separate this into those that are connected in some way or linked with communication versus some stand-alone type of controllers, and anybody that's going to be in the networked part of it has got a real problem if they can't bring a lot of money with it, and these businesses just don't make that kind of money, they just don't. At the low end, we are cost-competitive. We bought Samsung controller - that's one of the reasons we did that.

That's right.

Is so they could make sure that we were alert to everything going on in the Asia Pacific and not only that, but they have the capability of doing that at least as well if not better.

Yeah, thanks, that's a help. Thank you, Don.

We'll go next to Mark Koznarek with Midwest Research.

Good morning. I have a couple of questions here - number one is kind of a - maybe a clarification or an enhancement on the 2003 outlook, which would be what kind of revenue growth would underpin the two scenarios that we're talking about here?

Sure, Mark, it's Mike. Good question. You've seen the parameters we put on it. If you look at the low end of the range we put out there, if you want to call it that - the $1.05, obviously - the way we characterize it is that would ensue if business, based on a run rate kind of basis, stayed flat from where we were in the fourth quarter. If you extrapolate that out to the full year in terms of what the '03 over '02 growth would be for the company, it's in the low-ish single digits - 2 or 3 percent kind of growth would ensue. At the top end of the range, it's a little bit higher than that. If we were up modestly, you know, low single digits from the current run rates, we'd be looking at annual growth, maybe a point or two higher than that.

Okay, so 4 to 5 percent on the top end?

You got it.

Okay, then here in the fourth quarter, I wanted to explore a little bit on profitability in Control Systems looking at it relative to the prior quarter.

Sure, absolutely.

Because as we look at revenue would kind of increase slightly here, but operating income dropped off $6 million. So could you talk about what was going on there?

Yeah, absolutely, [Mark]. Let me deconstruct it a little bit for you. You're quite right - segment margins were down 6 million. Really, we had planned on them to be about flattish for the quarter and the thing that happened with our distributor in Texas - what was the $6 million difference there that brought it down to 85 million - if you look at the sequential sales increase of about $12 million, almost all of that - all but 2 million of it - came from two things. One was the sequential impact of the acquisitions we made in the third quarter, which, in the early days, as we've said, the acquisitions don't - we don't make dilutive acquisitions, but they don't produce wildly, too, so they're about flat. And the second thing that drove that sales increase in the quarter was just currency translation, i.e., a weakening dollar, and that obviously is just translating sales at a different rate. It doesn't come with a profit impact. So if you adjust for all those things, Control Systems had kind of a flattish quarter overall.

And then you're saying operating income would have essentially been flat, absent the Texas distributor.

Precisely.

Okay, great, thanks a lot.

Okay, Mark.

Next we'll take a question from Dan Kushaba with Deutsche Bank.

Good morning, guys.

Hi, Dan.

You talked in your press release a little bit about some targeted cost reduction actions in the first quarter. Can you explain a little bit about that?

I mentioned that in the remarks that I made. First of all, it's something that we do every single month. The first quarter a little larger than most, because of some newly incurred costs that I also mentioned, and rather than have some restructuring charge or something like that, we're going to deal with these things within the framework of the data that we give.

And how much do you anticipate that those targeted cost actions are going to - how much are they going to amount to in the quarter?

Remember, we're going to have some actions we're going to take, and there's going to be some savings that will offset part of it.

Yeah, let me pick up - the net - let me just expound on a couple of things Don said - one is, we really are doing this kind of stuff every quarter. The only reason we spiked it out this quarter for the two things Don said - one is - actually two things. One is, as he said, we're starting off the year with a little bit larger of a series of actions than we would normally do. A lot of quarters we're reinvesting a lot of this as well as we retool certain organizations or change out people or whatnot, but because of some of the structural increases to which Don alluded, whether it's health care costs or anything else, we wanted to give ourselves a little bit of tailwind going into this year, so we decided to kind of front-load those actions for this year in the first quarter. Compounding that, of course, is the fact, as we said, that our first quarter is, from the way the revenues just chunk out throughout the year, it's our weakest, just given that it's the shortest. So it's got a magnified impact on the quarter, and that's the only reason we talked about it this quarter versus every other quarter when we're doing it and spiking it out. It will add up to a net cost of a couple of pennies of earnings, after tax, this quarter.

Okay, so don't read too much into it - that's an ongoing effort, I guess.

It is. Really, what we're doing is, we're taking what we probably would have done over the course of the year and front-loading it into the first quarter.

Okay, good enough. Just one more question, if I could - you'd said in your opening remarks that you thought you were taking market share in most of your product lines - does that include the Reliance Motor business?

Yes, it does. Power Systems results - the Motors improvement had a big impact on the improvement that you see in Power Systems, and that comes about from two reasons - one is the terrific job that group has done with the Rockwell Lean efforts that are going on there, and I mean they are significant; and then the market share that you alluded to.

Right. Don, I understand why you would pick up share on the Allen-Bradley side of the business in terms of your open architecture and some of the things you're doing there - what are you offering on the motor side of the business? You know, keeping price, let's say, equal, that would allow you, in your mind, to gain market share?

First of all, a super-high efficiency motor that a lot of people are interested in today because of energy costs, that's one thing; we can make rapid deliveries, is another; we've instituted a much stronger channel program in the power transmission part of the business is another; and there's certainly no disadvantage to anybody that would buy our motor; and then the last reason is, remember, when we went through some of our difficulties we lost market share, and I think a lot of these customers are glad to see us back where we are.

Good enough, thank you.

We'll hear next from Richard Eastman with Robert W. Baird.

Yes, good morning. Two questions - one is, could you just elaborate for a minute or two on your initiatives within the Power Systems business on the service side? You had alluded to that earlier, and we tend to focus on GMS. Is there a service component of the Power Systems business that we should be spending some time on?

Absolutely. As a matter of fact, it's growing at 20 percent per year, it did last year, it will again this year. It's an effort that Joe initiated down there as part of this overall company-wide effort to move into services and solutions.

Can you just give us a feel for the size of the business in dollars?

It's about a $50 million business. In fact, it was just a $50 million business this year, and Joe's got plans for it to grow by at least 20 percent again next year. It's a variety of stuff from things that Reliance has been doing for a long time, like just servicing motors. We've got motor service shops around the country. He's been doing a lot of work in consulting on Lean manufacturing and asset management kind of areas as well. He's really built a very nice broad-based service business that's getting a lot of attention from customers.

To go out into your customer base and do surveys, motor surveys and those kind of things to help them, both with efficiency and asset management and those kinds of things are another part of what's going on.

Yeah, Don was just alluding to - we don't talk about it as much, and maybe that's our fault. A lot of the work that Joe is doing is right tied in with GMS - a lot of the stuff that Don was just alluding to on the asset management side, they're doing hand-in-hand with the GMS guys. So it's one face of the marketplace - we just book keep it and Power Systems versus GMS.

Okay, thank you. And then one last thought - in terms of the Controls business within the automation control area - so in other words, the controllers, the platforms there - if you strip Logix and the great growth we've had there out of that segment, is the core PLC business up year-over-year? I know we've taken share, but has that market grown?

You may know for sure what that is. I think - and I haven't looked at the figure recently, but it's about flat.

Okay, so - but we're not seeing a lot of cannibalization with the Logix product line?

Some of it would be cannibalization of growth of the other. I mean, so, you have to say that. But we've tried to be very careful how we got all this stuff introduced, because it was just the right thing to do, but we're still tickled to death to get the core PLC5 orders that have been in the marketplace for a long, long time.

Okay, very good. Thank you.

We’ll go next to Nicole Perrin, with Bank of America.

Good morning, guys. Mike, I just wanted to drill down a little bit, I guess, further into the operating profit sequential growth that we're seeing. And also just in terms of the '03 guidance, you said revenues should be up, at the low end of the range, 2 to 3 percent. I'm trying to figure out the dynamics, because even if you add back, you know, the 6 million, you're still going from huge profit improvements on minimal sales growth sequentially over the course of 2002 to roughly flat. So I'm wondering if you can just help me understand the margin dynamics. Are the increased auto sales that you're getting lower margin? And how should we think about Control Systems' margins as we progress through next year?

Okay, Nicole, boy, there was a lot in there.

Sorry.

No, it's okay. We followed it fine. I don't know where to start here. You tied me up in a knot. Can I start on the sales and then drill down to the profit?

Yes, please.

Okay, thanks. The sales, just so everybody understands the dynamics - absolutely, Nicole. I think - it sounds like you're getting it right - where we, as Don said, and as we talk to you every quarter and in between then, we started the year at a pretty low base - well, we finished '01 on a very low base. It declined a little bit at the beginning of '02 and then started to increase, the point being that the first half of '02 was a lot lower than the second half of '02. So we're starting in '03 on a much higher base than we started '02 on. It's just a dynamic of the way our business laid out in '02 - that very modest to zero increases from where we ended up '02 translate into a couple percent sales growth, full-year over full-year, just because of where we began '02. Was that comprehensible at all?

Yup.

Good, okay. So that's the sales dynamic. Now, Power Systems is a little bit different. Their year was a bit more linear than Control Systems was in '02, but you've got a little bit of that going on as well. On the profit side, '04 - I don't want to call it an anomaly, but it really was. The sequential story there was that but for the Warren things, margins were about flattish. The automotive jobs - I can't tell you with any precision, sitting right here, right now, whether those things come with lower margins. They tend to be, frankly, in the product areas that are just as good if not better than our average time - weighted average margin. We had a good quarter in Control Systems in the third quarter with some high-margin stuff. We had forecasted it to be about flattish from a margin standpoint in the fourth quarter. You're going to see sequentially margins, obviously, start lower in Q1 of this year because of the sales dynamic, but I think if you're thinking full-year margin over full-year margin in Control Systems on that flattish scenario that's at the bottom end of the range, it's going to be up. This year was up about 200 basis points, start to finish. Next year in that flat scenario, full-year over full-year, that margin ought to be up at least 100, maybe a little bit more, basis points.

Okay, and I guess also, could you just provide a little bit more color on the end markets for control systems? I mean, as you look - obviously, auto is strong but could you drill down a little bit deeper into some of the other end markets?

I just went over that again this morning, as I told you, we do that on an extensive conference call with our sales and marketing people. I've already talked about automotive. We view that - I mean, it is - I think, when you get to food and beverage and life sciences, very, very, very modest growth. I mean, you could almost call it flat, but it is up just a little bit.

You get to pulp and paper -- that is predicted to be flat. You get to metals, it may actually be up a little bit, but, remember, that's the smallest one of our industries that we capture, and then oil and gas, petrochemical, up very slightly. Mining and cement, up very slightly; semiconductor, up a little bit; and as you go outside the United States, kind of a question mark right now, especially in Europe. I think it's likely to be flat. Asia Pacific and Latin and South America, up -

It's really, Nicole, usually we slug through those - there's really, other than the automotive, which we did spike out, there's really, in the other end markets, not a heck of a lot different than 90 days ago on balance.

Okay, great. Thank you.

We'll take our next question from Donna Takeda with Merrill Lynch.

Thank you, good morning. Could I follow up - Don, you just mentioned that you were looking for food and beverage and life science to be essentially flat this coming year?

Flat to up a little bit, I said.

And yet this year that business, particularly the pharmaceutical side, looked very strong. I think that it sounded like it was one of the growth drivers in the Process Solutions business. Could you talk about what's changing next year versus this?

Yeah, I think pharma and our entry into through things like [mech] data and so forth - those will grow pretty nicely. It's still a relatively small part, and then when you put all that together, you're talking about flat to up a little bit, and by up a little bit - between 1 and 2 percent maybe.

Donna, sorry to charge in - consumer is our largest segment. It's a little bit over a third of Control Systems. So we really - we go a lot by how that sector goes. As Don said, the pharma part and the batch presses part, per se, is a small piece of that, maybe 5 percent of Control Systems. The weighted average of it is - still, you're talking about kind of 1 to 2 percent GDP kind of growth if, indeed, we do get - as the forecasters say - something in excess 2, 2.5 percent GDP next year.

Okay, great. Also, could you give us a little bit more color on what you're seeing in Europe, maybe either by served market or by country? Is one area weaker - substantially weaker - than another?

Mike, I'm not sure where Jerry is the weakest. Obviously, overall, it's about flat, because Germany is such an important part of that. It's got to be flat to down because there are a couple of countries in there that we have experienced some growth in, and those were basically the UK and, I think we gained - maybe through gained market share and so forth - up a little bit in France, Spain.

The real weakness, as you would suspect, was in the Germanic and still is in the Germanic countries, which are real important for us. Germany goes without saying, is our biggest country; Switzerland is one of our biggest - a lot of machine builders and OEMs there; Italy has been kind of mixed. Don talked about the two or the three best ones for us this year, which were UK, France, and Spain. Italy is kind of in the middle of the big countries, and then Switzerland and Germany, we're just seeing no life out of right now, and we're being very, very careful in terms of our cost structure there. Frankly, some of these actions here in the first quarter are dealing with those issues.

Great. Thanks very much.

We'll go next to John Baliotti with UBS Warburg.

Mike, could you do us a favor? You talked about capex, and you were off about 2.7 percent of sales, I think. I think after the last quarter you guys had talked about something, obviously, depending on the business activity of - I think it was 150 million or something.

For next year?

Is that still where you think you're going to be?

We're probably a little less than that, John. Our budget for next year is $140 million, but we've got a - like this year, a contingency in there where we dole it out as and when we see business coming back. So I think a range of, say, 120, 125 to 140 for next year is the right range.

Okay, and on somewhat related - do you have a sense of your customers, sort of, where they are in terms of utilization - just ballpark? I think they were somewhere in, like, the 70- to 75-percent range?

I'll tell you, John, it's so - we've got so many customers and it's so all over the board, the only thing I can feel safe in giving you is the same data that I'm sure you read from people like [MAPI] that we follow closely, and that's still in the 75-, 76-percent range. It's ticking up slightly - the ISN data - obviously you saw when it was released last week.

Right, okay, great. Thanks.

Sure.

Next, we'll hear from Quinten Newfer with Lazard Freres.

Good morning, guys. I have some nitpicky questions, basically - everything else has been answered. Tax rate - hold it steady at 24 percent, Mike?

No, no, we've been saying pretty consistently on these calls and otherwise that next year's rate is going to be 30 percent, and that's the good number.

Okay, good. Any change in - we haven't talked at all about pension. I don't think it's a big - I think I calculated only 3 or 4 cents of impact if you did bring - even if you brought discount rate and your assumed return rate down, do you have any guidance on what you've done with those?

Absolutely, let me give you some statistics. It will all be in our 10-K that we'll be filing in about a week and a half, two weeks. Pension expense was up this year about 15 million. It was 10 million last year, it was about 25 this year. Before you ask, let me give you a couple more statistics. We told you before that we brought the rate of return down this year in '02. It was 9.75 last year, we brought it down to 9 this year. We intend to bring it down another 50 basis points for '03, and your math is pretty good, [Quinten], that's about 10 million bucks on a pretax basis, or your 3 to 4 pennies. And so you could look for an increase in that 25 next year by at least 10 million based on the expected rate of return decrease.

Okay. Then corporate expenses have been running about $9 million or $10 million a quarter for the last two quarters if we strip out the nonrecurring. Is 40 a reasonable run rate for next year?

No, no, I think if you strip out the unusual stuff, and we can help you, Tom can help you go through this, it's been running more in the $16 million to $18 million range on a quarterly basis, and that's still, for next year, a pretty good estimate.

It was 9 million in the third quarter, right? I'll talk with Tom offline.

[crosstalk]

There was a whole bunch of unusual stuff in there that we spiked out in the last quarter.

Okay, thanks.

Next we'll go to Michael Reagan with Credit Suisse First Boston.

Thanks, good morning. Mike and Don, you both addressed the notion of leverage with a little bit of volume coming back, and the question has been asked already, Mike, just about what happened sequentially and why we didn't get any leverage, but your answer got us back to sort of flat operating profit for Control Systems ex the Warner issue, but you still had a $12 million increase in revenue sequentially. So just, you know, Don, relative to your outlook for real leverage in this business on even modest volume, not to beat a dead horse, but why didn't we get it in the fourth quarter, even if after we made the adjustments for the nonrecurring stuff - was the 12 million, Mike - that wasn't from acquisitions, because the acquisitions weren't that big.

Michael, let me go through it once again - the 12 million, all but 2 million of that sequential increase came from the sequential increase in the sales from acquisitions Q4 over Q3. You're right, they weren't that big, but of that increase it was a couple of million dollars of the $12 million sequential increase and all the rest but 2 million came from currency translation. Again, just a weakening dollar. So you've got Control Systems without those two things flattish sort of quarter-over-quarter, and you're dealing there with a lot of small numbers. You know, it's going to be -

- okay, that answers it.

Okay.

Thanks.

Yup.

Next we'll go to Jeff Gates with ECF Value Fund.

Yeah, can you talk about what the principal covenants are in the bank deal and what the ability is to the restricted payments tests?

Sure. There's only one covenant, and it's a debt-to-cap covenant of 60 percent.

So as long as you stay within that, you can do whatever share repurchases you want?

Absolutely, yes.

Great, thank you.

Next we'll go to Andrew Gunlach with ING Furman Selz.

Yeah, just a follow-up to the previous question - in your guidance, what are you assuming, if any, for share repurchases?

We will be in the market with - I'd rather not, frankly, say right now what kind of share repurchases we have built in for a variety of reasons, but we intend on buying a couple million shares back next year.

Okay, but it's built into your guidance?

Absolutely.

And what do you think you can do in terms of working capital improvements?

We obviously had some significant improvements this year. Sales came down and, frankly, as we improved days outstanding a little bit and held inventory turns relatively flat, even in the decline, our plans for next are for basically flat working capital. That sales pickup here a little bit if - we might do a little bit better than that, but that's what we've got baked into our free cash flow thinking for next year.

Great, thank you.

Next we'll go to Neil Blaken with Cadence Capital Management.

Hey, thanks, my question has actually been answered.

Operator, do we have any more questioners on the line?

Yes, we do. We have a follow-up from Mark Koznarek with Midwest Research.

Mine has been answered also, thank you.

We'll go to Seth Turkeltaub with SR Capital.

Good morning. Just going over the cash flow quickly, I think you had a couple of one-timers this year including, I think, an increased pension contribution. I was just trying to figure out - if we think about cash flow next year, what one-timers go away?

You are right. We did contribute - make a contribution to our U.S. qualified pension plan in the second quarter - January - second quarter of this year. That was something that was in our spin-off agreement with Collins. Because they're a government contractor, they were required at the time of the spin to true up their plan to certain levels, and we said we would do the same, and that drove out a contribution this past year. So that one would go away.

How much was that?

Twenty-four million dollars. We don't have anything baked in this year for pension contribution. We're not required to do so, though, depending on how things go, we may or may not. Time will tell on that one. I guess, to be responsive to your question, that's the only unusual thing. We had a couple of tax refunds this year, nothing huge, but those won't repeat next year.

I guess the heart of my question is - is there any reason why next year's free cash flow shouldn't be as good as this year?

Yeah, I think there were two principal ones - if you look at this year, we under spent our - on capital expenditures our depreciation by about 80 million bucks. So that was $80 million source of cash, just fixed capital investments less than fixed capital depreciation, and somebody asked the question before - I don't think that dealt, number one, depreciation is coming down just a tad next year, $4 million or $5 million, and capex will go up. So that delta won't be nearly as big. And, again, if you look at the cash flow statement, we took about $100 million out of receivables and inventory. As I said, a couple of questions ago, I wouldn't see that repeating again in the kind of flattish, stable, to up a little bit sales environment that we're foreseeing here. So that's a lot of money, those two things, and for that reason we wouldn't see free cash flow next year on the same levels that we just produced.

Okay, okay, great, thanks.

That concludes the question-and-answer portion of our conference call. At this time, I'd like to turn the call back to Mr. Mullany for any closing comments.

Thank you, Operator. I just want to say thanks, everyone, for joining us on the call today. If you have any further questions just feel free to give me a call. Thanks again.

Thank you. That concludes today's conference call. At this time you may disconnect. Thank you and have a great day.